Consideration Required for PA Noncompetes

In a clear victory for Pennsylvania employees, the Pennsylvania Supreme Court recently held in a case of first impression that an employer cannot use so called “magic language” to impose noncompete clauses where no significant benefit is provided to the agreeing employee. The continuation of employment on its own, the court found, is not enough to be considered sufficient consideration (an added benefit to the employee, such as a raise or promotion) to support a restrictive covenant to not compete. In other words, a simple statement agreeing to be “legally bound” that is unaccompanied by adequate consideration is not an enforceable noncompete agreement under Pennsylvania law. The court also concluded that an employee is not precluded from challenging an agreement not to compete entered into after the start of employment.

In Socko v. Mid-Atlantic Systems of CPA Inc., the state Supreme Court affirmed the Superior Court’s May 2014 ruling that a noncompete agreement that a waterproofing company attempted to enforce against a former salesman was, in fact, unenforceable. The salesman had signed an agreement which stated that the parties intended to be “legally bound.” However, the employer offered no new consideration for the noncompete agreement. The employer argued that simply reciting the “magic language” of the Uniform Written Obligations Act (“UWOA”) made the agreement enforceable.

While the court agreed that “based solely upon the language of the UWOA,” the agreement would be enforceable against Socko, it ultimately decided that such an outcome would be inconsistent with Pennsylvania’s long history of “strongly disfavoring covenants in restraint of trade.” This means that in order for a noncompete agreement to be enforceable under Pennsylvania law, it must either be signed at the start of employment or supported by additional consideration.

In Pennsylvania, employees ranging from hourly workers to high-level executives are often required to sign noncompete agreements as a condition of employment. Adding to the stress of job seekers and the unemploymed, employers frequently sue (or threaten to sue) their former employees based on such agreements. The Socko decision ensures that an employer who seeks to add a noncompete after the start of employment must give the employee some benefit before attempting to interfere with the employee’s right to make a living.